Whole Life Insurance Explained

Learn How Whole Life Insurance Works

Whole life insurance can be considered the foundation on which permanent
life insurance is built.

There are many variations of the permanent
life insurance policy
but they are all based on the whole life policy...

The whole life policy can also be considered an endowment to age 100. The
premium paid purchases a specific death benefit and produces a specific
cash value which are guaranteed as long as you choose to keep the
policy in force.

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Whole life premiums
are higher than term life premiums and are guaranteed to remain level for as long as you own your policy.

Non Participating Policies

There are two basic types of whole life insurance policies.
First, there is the non-participating whole life policy which has cash
values but do not participate in dividends earned by the company.

Participating Policies

The second type is the participating whole life insurance
policy which does participate in the expense, investment and mortality
experience of the life insurance company. These whole life insurance
policies have cash values and earn dividends.
Dividends
are not guaranteed.

Cash Values

Whole life policies have cash values which are available to
you if you should have a need for additional cash. It can also be used
to provide additional income at retirement.

The purpose of any
type of life insurance
is protection in the event of premature death. More often than not you
buy these policies for family protection. One of the additional benefits
of whole life is that the cash values and dividends accumulate tax
deferred.

Let us suppose the cash values are used to provide a
retirement income,
when you receive the income you will likely be paying income taxes at a
lower rate than the rate you would be paying while you were funding the
plan. Tax free accumulation of your cash values and dividends is
therefore a plus factor.

Death Benefit

The guaranteed death benefit of a whole life policy can be paid to your
beneficiary
in one lump sum or in the form of a monthly income. It can be used to
protect a family
in the event of the death of a breadwinner or for business insurance purposes.

Buy-Sell Agreements

When
partners
or small
corporation owners
have a buy-sell agreement and one of the partners or
shareholders
dies the survivors can use the proceeds of the policy to purchase the
deceased partners shares. This allows them to maintain control of the
company. Term life insurance can be used for this purpose but many
business people use whole life because it lasts for ever...so to speak.

Key Employees

Whole life can be used for coverage on a
key employee.
In the case of the premature death of this key person the proceeds are
paid to the the company. This policy is used as a cushion to help the
business maintain their operations without any financial problems while
they find a replacement.

Estate Taxes

Whole life insurance can be used to pay estate taxes due on the estate of a deceased person...thus leaving the
estate
in tact for the heirs...allowing it to be passed on free and clear.

Policy Loans

As previously mentioned...whole life policies build cash
values which can be accessed by the insured in an emergency. The owner
of the policy can take a loan from the life insurance company. This loan
can be repaid at the convenience of the policy owner.

Although this loan need not be repaid it is recommended that you
do repay it as the death benefit will be reduced by the outstanding
amount...and the cash value will be much less in later years. Interest
is also charged on the unpaid balance.

Mortgage Redemption And Cancellation

Whole life insurance can be used for mortgage redemption or mortgage cancellation. At some point the balance owed on
the mortgage of a house, or any piece of property with a mortgage, will
become equal to the cash value of the policy. The cash can be taken from
the policy and used to pay off the mortgage.

These policies are usually specifically targeted to this specific
event, even though any life policy with sufficient anticipated cash
value can be used.

College Education

A policy owner can plan and use a whole life insurance policy to fund college education for children.

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